In the latest in the long saga of wrongful dismissal cases against Canac Kitchens, Justice Lederman of the Ontario Superior Court has confirmed that overtime pay is included in the calculation of damages for reasonable notice.

The 48-year-old shipping supervisor had been employed by Canac for 24 years when his employment was terminated. There was a dispute as to whether the employee’s base salary was $52,000 or $65,000 per year, but both parties agreed that the employee had earned $96,703.34 in 2006, $91,794.61 in 2007, and $38,115.95 in the first five months of 2008, inclusive of overtime. Upon termination, the employee was only paid a lump sum equal to the amounts to which he was entitled for pay in lieu of notice and severance pay under the Employment Standards Act, 2000 (the “ESA”) and benefit continuation for the minimum period under the ESA. The employee brought an action against the employer for wrongful dismissal.

On the issue of whether damages should be calculated based on the employee’s annual base pay, without any reference to overtime pay, the employer argued that the employee would have had limited opportunity to work overtime in 2008 and therefore the damages for reasonable notice should be calculated without regard to overtime. The employee submitted that, in view of the significant overtime worked in the past years, his damages should be assessed based on his total earnings, including overtime.

The Ontario Court held that if overtime has been paid in the years immediately preceding the termination, it is appropriate to take that overtime into account when assessing damages for wrongful dismissal. Calculation of damages in wrongful dismissal actions is based on global compensation that the employee was receiving. In this case, overtime pay had become an integral part of the employee’s anticipated income and should be considered as compensable damages. The fact that the overtime hours were declining was irrelevant.

The employee was awarded 20 months of reasonable notice, calculated based on his average earnings over the past 2.4 years, including overtime.

When terminating the employment of employees who have worked significant amounts of overtime, employers should be mindful that, at common law, absent a contractual termination provision limiting the employee’s entitlement, the employee is entitled to reasonable notice that includes all elements of the employee’s compensation. As a result, to avoid the risk of litigation on this issue, employers may need to calculate the employee’s separation package on the employee’s average earnings, not their base rate alone.

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